ECO105Y1 Lecture Notes - Lecture 21: Potential Output, Human Capital, Thermostat
Document Summary
Fiscal policies changes in government spending, taxes, and transf ers act as aggregate demand shocks, have multiplied impact on agg regate demand, and can counter output gaps. Enlarged gdp circular flow of income and spending with banking system. Fiscal policy changes in government purchases, taxes, transfers to achieve macroe conomic outcomes of steady growth, full employment, and stable price s. Circular flow transmits the effects of fiscal policy. Injection spending in the circular flow not starting with consumers: g (gove rnment spending), Leakage spending leaking out of the circular flow through taxes, saving, im ports. Multiplier effect spending injection has multiplied effect on aggregate demand. Size of multiplier effects depends on leakages out of circular flow. Multiplier effect for tax and transfer changes smaller than for government spending. Change in injections g , i , x is aggregate demand shock, shift ing ad rightward ( injections) by multiplied effect of initial injection injections) or leftward.
